INTRODUCTION
The fiscal impact of the global crisis has reinforced the urgency of pension and health entitlement reform.2 Staff projections suggest that age-related outlays (pensions and health spending) will rise by 4 to 5 percent of GDP in the advanced economies over the next 20 years, underscoring the need to take steps to stabilize these outlays in relation to GDP. With the economic recovery not yet fully established, this paper emphasizes their short-run macro impact in order to address concerns that these reforms can undermine short-run growth.3

We examine the preferred set of public pension reforms using the IMF's Global Integrated Monetary and Fiscal (GIMF) model parameterized on data for five regions as representing the entire world. We consider three policy reform options relating to pay-as-you-go public pension systems that are commonly discussed in the literature. This analytical framework allows us to approximately gauge the effects of these reforms on labor and capital markets and growth in the short and long run.4 (i) Raising the retirement age: this reduces lifetime benefits paid to pensioners. Encouraging longer working lives with higher earned income may lead to a reduction in saving and increase in consumption during working years. In addition, increased fiscal saving will have long-run positive effects on output through lowering the cost of capital and crowding in investment. (ii) Reducing pension benefits: this increases agents‘ incentives to raise savings in order to avoid a sharper reduction in income and consumption in retirement. It would reduce consumption in the short to medium run, but would increase investment over the long run. (iii) Increasing contribution rates: this leads to distortionary supply-side effects for labor, which combined with a negative aggregate demand on real disposable income, depresses real activity in both the short and long run.

We assess how the policies compare in attaining the twin goals of strong, sustainable, and balanced growth and fiscal stability (i.e., stabilizing the debt-to-GDP ratio against rising pension entitlements). The key results show that increasing the retirement age has the largest impact on growth compared to reducing benefits, while increasing contribution rates as approximated by an increase in taxes on labor income has the least favorable effect on output. Besides boosting domestic demand in the short run, lengthening working lives of employees reduces the pressure on governments to cut pension benefits significantly or to raise payroll and labor income taxes. Reducing such benefits can lead to an increase in private savings and an unwarranted weakening of a fragile domestic demand in the short run, while raising taxes can distort incentives to supply labor. We also found that if regions cooperate in pursuing fiscal reform, the impact will be greater than if only one or some of the regions in the world undertake reform separately. In all, early and resolute action to reduce future age-related spending or finance the spending could improve fiscal sustainability over the medium run, significantly more if such reforms are enacted in a cooperative fashion.

[...]

CONCLUSION

We considered reforms to the pension system that can help ensure the long-run viability of public finances, while mindful of their short-run effect on economic activity in the midst of a global financial crisis. This is carried out within a dynamic general equilibrium model (GIMF) that captures the important economic interrelationships at a national and international level. We emphasized measures to contain and fund the rising costs of age-related spending in the medium to long run. We find that reforms which lead to short-run adverse effects on real GDP (i.e., benefit reductions) are largely outweighed by the benefits of declining real interest rates and the positive effect on future potential productive capacity. The reform which has the most positive effects in the long run is lengthening the working lives of employees, effectively raising the size of the active labor force relative to the retiree population. It helps boost domestic demand in the short run but also eases off the pressure on governments to cut pension benefits alone—which can lead to additional private savings and cause fragile domestic demand to fall in the short run—or to raise payroll and labor income taxes—which can distort incentives to supply labor. We also found that the impact on real GDP of a cooperative approach to age-related fiscal reforms is greater compared to a case where one but not all regions undertake reform.

In terms of public finances, our results generally show that stabilizing the GDP share of age-related expenditures leads to a sizable decline in the debt-to-GDP ratio. Early efforts and resolute action to reduce future age-related spending or finance the spending through additional tax increases and other measures (preferably through an increase in retirement age) could significantly improve fiscal sustainability in several countries over the medium run, and more so if such reforms are enacted in a cooperative fashion.

The FDA Is Evading the Law. By SCOTT GOTTLIEB
Europeans are approving important new drugs more rapidly than we are.
WSJ, Dec 24, 2010
http://online.wsj.com/article/SB10001424052748704034804576025981869663212.html

This year, the Food and Drug Administration rejected the only medicine capable of treating the rare and fatal lung disease known as idiopathic pulmonary fibrosis. Pirfenidone, which has been available in Japan since 2008 and was just approved in Europe, was spurned by the FDA because the drug only showed efficacy in a single big trial—not the two large studies the FDA now requires. The decision to ban the drug is one of a rash of recent decisions that shows the FDA is making it more and more difficult for promising drugs to reach severely ill patients.

Last week, the FDA revoked an approval for the cancer drug Avastin because it said that evidence supporting its use in breast cancer wasn't strong enough. (The drug was judged ineffective because it merely stalls the spread of tumors.) European regulators, looking at the same data, made the opposite decision.

It wasn't supposed to be this way. In 1997, Congress passed the FDA Modernization Act, which gave the FDA broad discretion to reduce the quantity and rigor of clinical data needed to approve drugs targeting grave illnesses. The purpose of the law was to save lives by reducing the cost and time needed to launch such medicines.

But the FDA has steadily disregarded many of the law's provisions. Longer, larger trials that require drug makers to evaluate "hard" endpoints (like how long a cancer patient lives) rather than "surrogate" endpoints (like a drug's ability to shrink tumors) give FDA reviewers more statistical confidence. Reviewers prefer these drawn-out trials because they insulate the FDA from critics who say that it isn't focused enough on safety. But bigger trials increase the time needed to develop a drug, keeping it out of the hands of patients.

The Modernization Act also allowed the FDA to conduct drug trials in which patients are treated with an experimental medicine in a single group or "arm," and the trial can be completed in less than a year. But the FDA doesn't often opt for such trials. The agency commonly requests more complex, "multi-arm" and "placebo controlled" studies, which can take three years to finish and are much more expensive. Each patient enrolled in a trial adds over $30,000 to drug-development costs.

Of 76 cancer drugs approved since 2005, the FDA gave only 13 "accelerated approval"—another process created under the Modernization Act to expedite drug development. From 2001 to 2003, 78% of the novel cancer drugs approved were granted accelerated approval. Since then only 32% got the designation.

What's more, the clinical trial requirements that the FDA is imposing on cancer drugs with accelerated approval are now as burdensome as the requirements imposed on regular drugs. So, practically speaking, having "accelerated approval" doesn't mean anything.

Europeans are now approving novel drugs an average of three months more rapidly than we do. Of 82 novel drugs that were submitted for approval in both the U.S. and Europe between 2006 to 2009, 11 were approved only in Europe. One is for relapsed ovarian cancer, another for bone cancer.

To reverse these discouraging trends, Congress should reaffirm the provisions of the Modernization Act. It should spell out in legislation that the FDA "shall"—rather than "may"—approve drugs for severe conditions on the basis of a single study, or a more lenient statistical orthodoxy than "two, randomized, placebo controlled trials."

While Congress may not want to get into the business of establishing the FDA's analytical methods, it can call on the agency to convene an advisory panel to cultivate principles that are more permissive when it comes to very bad diseases. And it could go a step further, empowering patient groups with a mechanism to seek review of FDA decisions.

Congress also needs to modernize the way the FDA's review process is organized in order to increase efficiency and enable more cooperation. The science embedded in the most novel drugs is increasingly complex, requiring collaboration across many disciplines, including clinical medicine, pharmacology and statistical modeling.

But in recent years, the FDA has carved out each scientific discipline into its own distinct office. In addition, new work rules allow drug reviewers to spend two days each week working from home. The result is that FDA scientists don't collaborate well. Reviewers rarely meet as full teams, so they struggle to resolve internal debates and provide timely feedback to drug makers. The FDA's scientists should be organized around areas of therapeutic expertise—not broken into discrete offices based on what degree they have.

Finally, the FDA should be required to disclose its reasons for rejecting a drug.

The next Congress will reauthorize a user fee program that funds the FDA's review process. It should use this legislation to revive the FDA's fundamental mission: giving very sick Americans the best medical options available.

Dr. Gottlieb, a former deputy commissioner of the Food and Drug Administration, is a fellow at the American Enterprise Institute and a practicing internist. He invests in and consults with drug companies.